Global Perspectives: Weighing in on the depreciating Dollar debate
Natalia Rivera
Issue date: 10/27/09 Section: Opinion
The global credit crisis of 2007-2009, a consequence of unregulated loaning and excessively low interest rates, has discouraged international investment in U.S. financial assets and debt securities. Decreasing confidence in American assets will mean less financing for the U.S. budget and deficit.
There are no signs of a decreasing budget deficit and some speculate that it will take up 13.5 percent of this year's GDP. Obama's economic stimulus package and proposed health care reform certainly will not assist in reducing the deficit.
Altogether, these economic factors will necessarily decrease international and domestic demand for the dollar, thus creating a surplus of currency that will cause a significant depreciation of the dollar.
Globalization also affects the value of the dollar. As emerging markets, such as China, play a more significant role in the global market, the United States' economic dominance will inevitably reduce.
Naturally, emerging markets as well as central banks will attempt to find alternatives to the U.S. dollar, which currently dominates the largest portion of central banks' reserves and is the main currency used to settle trade and financial transactions.
China is especially concerned with the depreciation of the U.S. currency since 60 percent of its official reserves is held in dollars. Russia has a similar problem with its reserves and is consequently diversifying its basket of currencies by increasing the share of euros.
According to Foreign Affairs journal, Russia has increased its shares of euros to about 47 percent while reducing its share of dollars to 42 percent. In general, European countries are opting for increasing their shares of euros, especially since the euro is, for the most part, more liquid than other international currencies.
Diversification may be a viable option for European countries, but China's situation is slightly more complicated. Although China would certainly appreciate alternatives to dollar reserves, its dependence on the American economy substantially limits its options. If the country's central bank attempted to exchange large amounts of dollar reserves for say, euros, the dollar would depreciate substantially, meaning that China's holdings would suffer even more losses.
There are no signs of a decreasing budget deficit and some speculate that it will take up 13.5 percent of this year's GDP. Obama's economic stimulus package and proposed health care reform certainly will not assist in reducing the deficit.
Altogether, these economic factors will necessarily decrease international and domestic demand for the dollar, thus creating a surplus of currency that will cause a significant depreciation of the dollar.
Globalization also affects the value of the dollar. As emerging markets, such as China, play a more significant role in the global market, the United States' economic dominance will inevitably reduce.
Naturally, emerging markets as well as central banks will attempt to find alternatives to the U.S. dollar, which currently dominates the largest portion of central banks' reserves and is the main currency used to settle trade and financial transactions.
China is especially concerned with the depreciation of the U.S. currency since 60 percent of its official reserves is held in dollars. Russia has a similar problem with its reserves and is consequently diversifying its basket of currencies by increasing the share of euros.
According to Foreign Affairs journal, Russia has increased its shares of euros to about 47 percent while reducing its share of dollars to 42 percent. In general, European countries are opting for increasing their shares of euros, especially since the euro is, for the most part, more liquid than other international currencies.
Diversification may be a viable option for European countries, but China's situation is slightly more complicated. Although China would certainly appreciate alternatives to dollar reserves, its dependence on the American economy substantially limits its options. If the country's central bank attempted to exchange large amounts of dollar reserves for say, euros, the dollar would depreciate substantially, meaning that China's holdings would suffer even more losses.
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